In the pharmaceutical industry, that hypercompetitive
business with astronomical costs, market exclusivity is of paramount
importance. And drug manufacturers will do almost anything keep hold of that
precious resource.

With market pressures from generic drug manufacturers at an
all-time high, firms have turned to what's known as "pay for delay," a stalling
tactic employed by originator pharmaceutical manufacturers to maintain market
share after a pharmaceutical patent has expired or has been found to be invalid
in court.

The general idea is that the originator and patent holder
pays a third party to delay competition from a generic equivalent of the pharmaceutical
in question. The third party may be a generic manufacturer, particularly in
court cases in which the generic manufacturer has challenged the originator's
patent. Sometimes, the third party is a pharmaceutical benefits management
(PBM) company, in which case, the payment may be made to induce the PBM company
to continue to favor the originator's version of the drug over that of a
generic competitor.

Pay for delay is highly controversial and has spawned
multiple government investigations and even lawsuits. The Federal Trade
Commission (FTC), for example, on its website devoted to "reporter resources,"
states unequivocally that "consumers lose when branded drug manufacturers use
illegal tactics to keep generic alternatives off the market." The website
continues that such "illegal" tactics involve "pay[ing] off the makers of
competing drugs to withhold their products from the market."

However, are pay-for-delay tactics actually illegal? The
Supreme Court refused to hear the appeal of the FTC in a pay-for-delay case
involving Schering Plough in 2001, and while many such cases are currently
wending their way through the court system, few have resulted in a definitive
ruling against such tactics. One 2006 case, involving the contraceptive Ovcon
by the originator Warner Chilcott, resulted in a settlement when the originator
agreed to drop an agreement with Barr, a generic manufacturer, that would have
prevented Barr from marketing a generic version of Ovcon. Currently, there are
no court cases brought by the FTC involving the second type of pay-for-delay
tactics, in which the originator pays the PBM company to continue to favor the
originator's version of the drug over that of a generic competitor.

To determine whether any pay-for-delay tactics are illegal,
it is important to note that companies are generally constrained in their
commercial behavior by anti-monopoly laws. Blatant collusion between companies
to fix prices is not permitted; for example, Perrigo Co. and Alpharma Inc. were
accused in 2004 of colluding to effectively fix prices for over-the-counter
store-brand children's liquid Ibuprofen, which is clearly illegal. A settlement
was reached in this case, requiring the companies to pay illegally obtained
profits from the alleged price-fixing deal.

Less blatant than collusion, mergers can also be
problematic. For example, the FTC either blocks or places restrictions on
mergers between two companies that would result in the new company having
monopoly power in the market. Pharmaceutical companies are not immune from such
requirements. For example, proposed mergers between Pfizer Inc. and Wyeth,
Schering-Plough Corp. and Merck & Co. Inc. and CSL Ltd. and Cerberus-Plasma
Holdings LLC all resulted in objections by the FTC due to monopoly concerns.
The first two mergers proceeded after it was agreed that the merged company
would divest parts of itself; the last merger failed, due to these concerns.
Thus, in general, monopoly behavior by pharmaceutical companies is not
permitted.

Patents, however, are one area in which a monopoly is
permitted, but with limitations. For example, patents have a defined lifetime
(most recently 20 years from the date of filing of the patent application,
barring any extensions). Still, even with this monopoly right, there are
limitations. "Tying," or forcing the purchase of products or services not
covered by a patent in order to be able to purchase a patented product, is
illegal in some circumstances. Sandoz Pharmaceuticals Corp. fell afoul of this
law when attempting to tie purchase distribution and patient-monitoring
services with purchase of clozapine, its (then) patent-protected schizophrenia
drug; the FTC considered this tying arrangement to be an abuse of the patent
monopoly. Furthermore, although a patent owner may license the patent, the
terms may be considered illegal if they involve tying, price-fixing and so
forth. Attempts to fix resale prices of a patented product through a license
are also not legal. Thus, even patent law does not permit a patent owner to
have an unrestrained monopoly on a product or even on terms for licensing the
patent.

Despite these robust antitrust laws, the FTC frequently
loses in court on pay-for-delay issues—and any of its successes have come
through settlements. This failure to curtail the practice is at least partly
due to the lack of explicit language in the law governing these arrangements.
The Hatch-Waxman law, which governs generic drugs, does not explicitly forbid
pay for delay. The FTC has been trying to induce Congress to support laws that
do explicitly forbid pay for delay, although no bills have passed both the House and
the Senate.

Thus, the FTC must rely on
more general antitrust law to block such arrangements—with relatively limited
success to date.

While the above forms of pay-for-delay arrangements have not
consistently been found to be illegal, the newest form, involving PBM companies
such as Medco, involve an even murkier area of the law. There is no law that
explicitly prevents this behavior, yet it clearly results in the enrichment of
the originator manufacturer at the expense of insurance companies, consumers or
both. The deal between Pfizer and Medco for Lipitor, in which Medco agrees to
supply patients with brand-name Lipitor even if a generic version has been
prescribed, does not directly hurt the consumer, as the copay/deductible is not
increased. However, insurance companies, employers and the U.S. government (as
an insurer) will all pay more money—straight into the pockets of Pfizer and
Medco, as the latter receives a "rebate" for such prescriptions. Is such a
"rebate" illegal? Is it even a rebate—or is it a bribe, as asserted by the
website "Public Citizen"?

These questions are not trivial, since bribes and kickbacks
are clearly illegal, while rebates are not necessarily illegal. For example,
it's illegal for a pharmaceutical company to bribe a doctor to prescribe its
drug for Medicare patients. A pharmaceutical company that engages in this
behavior may be the subject of a qui tam,
or whistleblower lawsuit, seeking to claw back the resulting illegal profits.
In 2010, Kos Pharmaceuticals, a subsidiary of Abbott Laboratories, agreed to
pay more than $41 million in a settlement of lawsuits for alleged kickbacks to
doctors who prescribed its drugs Advicor and Niaspan. The language of the
Anti-Kickback Statute (42 U.S.C. § 1320a-7b(b)) is not limited to prohibiting
kickbacks to doctors, but instead blocks such kickbacks to any entity involved
in referrals to particular service or product providers when such providers are
paid by Medicare/Medicaid (more generally referred in the statute as "federal
healthcare programs").

The arrangement could also potentially be challenged under
laws preventing price-fixing as previously described. Various pharmaceutical
chains, associations and providers of pharmacy network services have been
pursued by the FTC for various forms of price fixing, collusion, illegal
boycott and other anticompetitive behavior. Yet it is possible that none of the
laws that could potentially be applied clearly block the Pfizer/Medco
arrangement, as the two entities are not competitors. Pfizer is not attempting
to abuse patent monopoly power, the deal does not specifically fix the price of
the drug and Medco is not the sole player in the PBM market; it's not even the
largest of the three major competitors in this area (although the proposed
purchase of Medco by Express Scripts, another of the three competitors, would
make the merged company the single largest player in the PBM area).

Clearly, all parties in the healthcare system would benefit
from clear laws in this area or, barring new laws, from a decisive court case
that would delineate permitted agreements and arrangements in this area. At the
moment, only the originator pharmaceutical companies and those with which they
reach an agreement, such as generic drug companies and PBMs, are benefiting
from the lack of legal clarity. The Hatch-Waxman Act clearly sought a balance
between the rights of pharmaceutical originators and generic manufacturers, to
ultimately provide the best benefits to consumers—both by encouraging (and
protecting) pharmaceutical innovation and by opening up the area of
pharmaceuticals to competition after patent expiry. However, pay to delay
threatens this balance, not only by providing additional months or even years
of an effective pharmaceutical originator dominant market position (if not
outright monopoly), but also by introducing uncertainty into the ability of
generic manufacturers to enter the market.

After all, with a pay-for-delay arrangement, generic
manufacturers may not be able to sell their products if no one will buy them.
Consumers, insurers, employers and the federal government would also benefit
from clarity in this area. Even originator pharmaceutical manufacturers would
benefit from a clear and consistent legal environment, as they would not be
under threat of potential lawsuits or investigations by the federal government
or other bodies.

Dr. D'vorah Graeser is
the founder and CEO of Graeser Associates International (GAI), an international
healthcare intellectual property firm. Dr. Graeser has been a U.S. patent agent
for more than 15 years and has extensive experience and expertise in the
biomedical field.